EUROPEAN COMMISSION ENTERPRISE AND INDUSTRY DIRECTORATE-GENERAL Promotion of SMEs’ competitiveness F INAL REPORT OF THE EXPERT GROUP OVERVIEW OF FAMILY–BUSINESS–RELEVANT ISSUES: RESEARCH, NETWORKS, POLICY MEASURES AND EXISTING STUDIES November 2009 2 Legal Notice This project was carried out by the European Commission and experts in the field of family business appointed by the national authorities, under the Multiannual Programme for Enterprise and Entrepreneurship coordinated by the European Commission’s Directorate-General for Enterprise and Industry. Although the work was carried out under the guidance of Commission officials and by experts appointed by the national governments, the views expressed in this document do not necessarily represent the opinion of the European Commission or the participating countries. Reproduction is authorised, provided the source is acknowledged. Further information: European Commission Directorate-General for Enterprise and Industry Unit E.3: Crafts, small businesses, cooperatives and mutuals Fax: +32-2-299.81.10 E-mail: Entr-Craft-Small-Business@ec.europa.eu Information on other projects: Information on other projects jointly carried out by the European Commission and by national administrations that address issues of promoting the competitiveness or European SMEs can be found on the web, at the following address: http://ec.europa.eu/enterprise/policies/sme/index_en.htm 3 TABLE OF CONTENTS EXECUTIVE SUMMARY 4 1. INTRODUCTION 6 1.1. Aim of the project and method 6 1.2. Result of the project and sources of information 6 2. DEFINING A ‘FAMILY BUSINESS’ 8 2.1. Characterising ‘family businesses’ 8 2.2. A European definition of a ‘Family Business’ 9 3. CHALLENGES 11 3.1. Unawareness of policy makers of the specificities of family businesses and their economic and social contribution 12 3.2. Financial issues 13 3.3. The importance of preparing business transfers early 15 3.4. Balancing family, ownership, and business aspects: Family Governance 16 3.5. Attracting and retaining a (skilled) workforce 17 3.6. Entrepreneurship education and family-business-specific management training 18 4. THE COMMISSION’S WORK 19 5. GOOD PRACTICES 21 6. CONCLUSIONS AND STRATEGIC RECOMMENDATIONS 22 Annex I — Good Practices 25 Annex II — Members of the Expert Group 28 Annex III — Bibliography 32 4 EXECUTIVE SUMMARY Family firms are important, not only because they make an essential contribution to the economy, but also because of the long-term stability they bring, the specific commitment they show to local communities, the responsibility they feel as owners and the values they stand for. These are precious factors against the backdrop of the current financial crisis. Family businesses make up more than 60 % of all European companies, encompassing a vast range of firms of different sizes and from different sectors. Most SMEs (especially micro and small enterprises) are family businesses and a large majority of family companies are SMEs. It is essential to agree on an accepted definition of what is a family business to have a better view. There is general agreement on three essential elements: the family, the business, and ownership. After having analysed existing definitions, the expert group proposes the following definition: A firm, of any size, is a family business, if: 1) The majority of decision-making rights is in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of their spouses, parents, child or children’s direct heirs. 2) The majority of decision-making rights are indirect or direct. 3) At least one representative of the family or kin is formally involved in the governance of the firm. 4) Listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25 per cent of the decision-making rights mandated by their share capital. The group recommends exploring opportunities to introduce this definition at national level. The European Commission should envisage using this definition where possible to help promote its use. The notion of ownership is fundamental to family businesses. It is important to improve our knowledge of ownership and how it affects the business behaviour of family firms. Many of the challenges faced by family businesses also concern SMEs in general. However, some affect family firms more specifically, and others are exclusive to them. Some challenges stem from the environment in which companies operate, e.g. policy makers are unaware of the specificities of family businesses and their economic and social contribution; financial issues related to gift and inheritance tax, access to finance without losing control of the firm, favourable tax treatment of reinvested profits. Some are related to the family firm’s internal matters e.g. 5 unawareness of the importance of planning company transfers early; balancing the family, ownership and business aspects within the enterprise; difficulties in attracting and retaining a skilled workforce. Other issues regarding education and research impact on both the environment and internal matters, e.g. (lack of) entrepreneurship education and family-business-specific management training, and the need for more research into family-business-specific issues. The institutional framework and policy initiatives regarding family businesses differ from country to country. Measures favouring family businesses are (or have been) implemented by different actors and tackle a range of problems, e.g. taxation, company law, planning the business transfer, awareness-raising through lobbying and policy advice, research and dissemination of information, promotion of entrepreneurship and family-business-specific education, and family governance. Exchanging the ‘good practices’ identified has great potential for development of the sector. The European Commission should continue to play a role in promoting the exchange of information. Family businesses already benefit from EU policies. The European Commission should continue mainstreaming family-business- relevant issues in all relevant schemes. National governments should consider adopting measures to create a more favourable environment for family businesses, for example in areas of taxation, company law, and the educational system. The group also recommends setting up a specific family business contact point in national administrations. Family businesses themselves and especially organisations representing the family business sector (at national and international levels) should take an active role in all efforts to raise awareness of the importance of the sector. They should also promote the development of a family business institutional framework in countries in which it is less developed. 6 1. INTRODUCTION 1.1. Aim of the project and method For the purpose of getting a more comprehensive overview of family businesses in Europe, their characteristics, specific needs, the institutional framework and initiatives already implemented in their favour, in 2007 the European Commission launched the project ‘Overview of family-business- relevant issues: research, networks, policy measures and recent studies’. This was funded by the Competitiveness and Innovation Framework Programme 2007-2013 (CIP). The project used the open method of coordination in the field of enterprise policy, which aims to focus political attention on key issues, agreed with national experts and in consultation with business organisations, to promote the exchange of experiences which may give rise to policy changes to improve the business environment. The information obtained should also serve as a basis for analysing the need for future policy initiatives at European level in favour of family business, of which small and medium sized businesses have hitherto been included in the Commission’s overall SME policy. 1.2. Result of the project and sources of information This report sets out the main results of the project and is based on two main sources of information: the discussions of the Expert Group on Family Business (hereinafter referred to as ‘the expert group’, ‘the experts’, or ‘the group’), and the study entitled ‘Overview of family-business-relevant issues’ (hereinafter referred to as ‘the study’). The report is the result of cooperation between the Commission and members of the expert group. The expert group began its work in 2007. Its members were appointed by the Member States and other countries participating in the Competitiveness and Innovation Framework Programme. Some experts in the field were also appointed by the European Commission. The group met five times between May 2007 and October 2009 to discuss the main problems faced by family- run businesses. It also identified existing research, good practices and family business organisations (networks). The experts also oversaw the production of the study, which was commissioned to KMU Forschung Austria in 2007 through an open call for tenders. Research was carried out in 2008. The study was completed and published in January 2009. 33 countries were covered: the EU27 Member States, other EEA countries (Liechtenstein, 7 Norway and Iceland) and the candidate countries (Turkey, Croatia and Macedonia). The study provides an overall description of family businesses at European level and more detailed information on each of the countries covered. It identifies a set of good practices and a database of family- business-related organisations. All these documents are available on the family business webpage of DG Enterprise & Industry. 1 It is important to point out that the study was carried out before the financial crisis broke out, and therefore the outcome does not describe its impact on family firms, or their special position in the context of the crisis (compared to non-family-run firms). The identity of a family business hinges on its ownership. Most SMEs (especially micro and small enterprises) are family businesses and a large majority of family companies are SMEs. Although the project does not exclude large family firms, it focuses on family business that are also SMEs. 2 References to other literature consulted are given throughout this report. 1 http://ec.europa.eu/enterprise/policies/sme/promoting-entrepreneurship/family- business/index_en.htm. 2 SMEs are defined in Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (Official Journal of the European Union L124/36, 20.5.2003). Further information at: http://ec.europa.eu/enterprise/enterprise_policy/sme_definition/index_en.htm . 8 2. DEFINING A ‘FAMILY BUSINESS’ One of the objectives of the project was to gain an overview of how family businesses are defined in the different countries surveyed. To avoid limiting or influencing the outlook of the research, no strict definition of a ‘family business’ was established beforehand. The work was guided by the general notion of ‘businesses in which a family has influence’. 2.1. Characterising ‘family businesses’ Family businesses cover a vast range of firms in different sectors and of different sizes. They range from sole proprietors to large international enterprises and make up more than 60 % of all European companies. 3 Specialised literature clearly shows that ‘there is not a single definition of ‘family business’ which is exclusively applied to every conceivable area, such as to public and policy discussions, to legal regulations, as an eligibility criterion for support services, and to the provision of statistical data and academic research’. 4 It suggests that, although the debate on this topic is far from exhausted, there is general agreement that a definition of family business has to incorporate three essential elements: the family, the business and ownership. This was first illustrated by the ‘3-circle’ model of family business developed by Tagiuri & Davis in 1982. The experts support the use of the 3-circle approach when studying the phenomenon of family businesses. Ownership is key to the business life of the firm. It enables a clear distinction to be made between family and non-family businesses. Taking the ‘ownership perspective’ rather than the ‘company size’ perspective can help improve understanding of the phenomenon. Related to this is the focus placed on the quality of assets in their balance sheets, i.e. family business financial management focuses on the balance sheet rather than the profit and loss account. 3 Figures may vary among studies (even in the same country) since they depend on the definition used. 4 KMU Forschung Austria, ‘Overview of family business relevant issues’, Vienna, 2008 (p. 1). Ownership Business Famil y Tagiuri & Davis, 1982. “3-Circle” model of family business 9 The study identified more than 90 definitions, which shows that even within the same country several different definitions can be used. They take into account many aspects, such as family ownership, involvement of the management, strategic control, business as the main source of income for the family and intergenerational transfers. One common feature to almost all definitions is that they are not operational, which to a large extent limits their usefulness, particularly for the production of reliable and comparable statistics on the sector. In addition, as Astrachan, Klein and Smyrnios have pointed out, ‘a definition of family is often missing’ and ‘this notable absence poses problems, particularly in an international context where families and cultures differ not only across geographical boundaries, but also over time.’ 5 Some definitions do not consider the status of being a ‘family business’ as static, but accept that it may drift between a family firm and a non-family firm. The study shows that the self-employed/one-person enterprises are considered family businesses in approximately one third of the countries surveyed. Sole proprietors (i.e. companies with one owner but that may employ other family and/or non family members) are considered to be family firms in most countries. 2.2. A European definition of a ‘Family Business’ The difficulties in reaching a commonly agreed definition are well documented and recognised by the group. In order to be useful, the definition must be simple, clear and easily applicable. It should enable statistics to be produced on the sector (e.g. contribution of family businesses to employment, total turnover of family businesses) and should be comparable between countries. The definition proposed in this report is based on the one formulated by the Finnish Working Group on Family Entrepreneurship (set up by the Ministry of Trade and Industry of Finland in 2006). The Finnish definition has been widely accepted and has the advantage of being comprehensive and operational. 6 5 ASTRACHAN, J. — KLEIN, S. — SMYRNIOS, K. ‘The F-PEC scale of family influence: a proposal to solving the family business definition problem’, in Handbook of Research on Family Business, Edward Elgar, UK, 2006 (p. 167). 6 The definition used by the Finnish Ministry of Trade and Industry is given on page 98 of the study. 10 With the aim of making it clearer and applicable to all types of enterprises (particularly vis-à-vis SMEs), some slight modifications to the terminology were made. 7 The proposed definition reads as follows: A firm, of any size, is a family business, if: (1) The majority of decision-making rights is in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of their spouses, parents, child or children’s direct heirs. (2) The majority of decision-making rights are indirect or direct. (3) At least one representative of the family or kin is formally involved in the governance of the firm. (4) Listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25 per cent of the decision-making rights mandated by their share capital. This definition includes family firms which have not yet gone through the first generational transfer. It also covers sole proprietors and the self- employed (providing there is a legal entity which can be transferred). This definition represents the opinion and agreement of the members of the expert group. The group recommends using it in the Member States and other countries covered by the project to produce quantitative (and comparable at European level) information on the family business sector. 7 For example, the term ‘votes’ was replaced by ‘decision-making rights’, ‘management and administration’ was replaced by ‘governance’, and it was also specified that at least one representative of the family or kin is ‘formally’ involved in the governance of the firm. [...]... aware of the importance of planning company transfers early) 11 3.1 Unawareness of policy makers of the specificities of family businesses and their economic and social contribution The limited awareness of policy makers of the specificities of family businesses and the contribution they make to society is due to the traditionally discrete behaviour of the sector This has changed in recent years and. .. The number and variety of measures in favour of the sector was higher in countries where the family business institutional framework is more developed An overview of these groups of measures is given in Annex I to this report A detailed description of the ten best practices selected is given in Annex IV to the study and in the database of family business organisations (in the description of activities)... follows:16 • Taxation: measures mainly targeting the taxation of reinvested profits and taxation of inheritance/gift tax Examples of the former are the tax credit for reinvested profits deriving from some activities in Malta, and the reduced income tax applied to a certain amount of earnings kept within specific types of enterprises in Austria Examples of countries in which inheritance and gift tax have... of the Netherlands is a unique example of this kind of measure: when the entrepreneur reaches the age of 55, he/she receives a letter reminding him/her of the importance of planning the transfer, and on the availability of tools included in the package.18 The ‘Succession Scoreboard’ of the Belgian Instituut voor het Familiebedrijf is an example of a free on-line self-test which provides a picture of. .. the following list of challenges was drawn up: • Challenges that arise from the environment in which companies operate: ◦ Unawareness of policy makers of the specificities of family businesses, and their economic and social contribution; ◦ Financial issues (e.g gift and inheritance tax, access to finance without losing control of the firm, favourable tax treatment of reinvested profits) • Challenges... aware of the importance of the family business sector, and to advocate favourable action The lack of awareness of the family business sector is not limited to policy makers Even though the notion of ‘family business’ seems well known and recognised by the general public, a clear and precise picture of the real contribution that family businesses make to society is lacking Therefore, the importance of. .. assessments and consultations on policy measures are open to the public and to all stakeholders 3.2 Financial issues Family businesses face the same financial constraints as any other type of business and also face certain specific challenges related to succession (transfer of the company within the family) and to the choice of financing method (equity vs debt financing, reinvestment of profits) In all... international exchange of experiences • Family governance Some countries acknowledge the importance of avoiding potential conflict between the family and the business dimensions and have put in place a considerable number of measures The availability of ‘governance codes for family businesses’ is one of the most common measures in this field They provide standard solutions that can be used by (and adapted to)... beyond the capital, and financial decisions and operations are ‘merely’ a method of financing, not the primary mean to make profits The understanding of the ownership dimension and how it affects the business behaviour of family firms should also be improved Member States and other countries participating in the project should support specialised research Experience in the field of family businesses... group 8 Summary Report of the Expert Group ‘Effects of tax systems on the retention of earnings and the increase of own equity’, Brussels, September 2008 (p 35) 9 IMF (Fiscal Affairs Department), ‘Debt bias and other distortions: crisis-related issues in tax policy , June 2009 14 ‘Effects of tax systems on the retention of earnings and the increase of own equity’.10 National governments may also consider . GROUP OVERVIEW OF FAMILY–BUSINESS–RELEVANT ISSUES: RESEARCH, NETWORKS, POLICY MEASURES AND EXISTING STUDIES November 2009 2 Legal. definition of a ‘Family Business’ 9 3. CHALLENGES 11 3.1. Unawareness of policy makers of the specificities of family businesses and their economic and social